General

Virtually every payment made by legal entities, as well as payments made by individuals obligated to maintain accounting records, is subject to withholding tax. The tax is, in practice, an advance payment of a resident recipient's income tax and may be used to offset the total annual tax due. However, withholding tax is usually final for nonresidents. The withholding agent is responsible for withholding the appropriate amount, providing tax withholding certificates, filing returns, and paying over the amounts withheld to the authorities within the following month.

Withholding tax returns must be filed and the tax paid on the dates set by the tax authorities. If withholdings are not made, or if partially made or not paid over to the authorities, the withholding agent is charged a penalty plus interest on a monthly basis.

Dividends and Branch Profits

Dividends paid are exempt from income tax and withholding tax in a resident recipient's hands. However, if the company's or branch's distributed profits are not taxed, the recipient is subject to income tax. A 7% withholding tax is usually imposed on the remittance of profits abroad; however, in 1997, the rate is 10% on oil company dividends. This rate will be reduced to 7% from 1998.

Interest

Banks and other financial institutions must withhold 7% on local interest payments, other than interest on savings accounts and other exempt interest. This rate may be modified by the Ministry of Finance but may not exceed 15%. The tax is not withheld from interest paid to financial institutions.

Interest paid abroad is not subject to a final tax withholding if certain tax and foreign exchange regulations are complied with.

Royalties

A 4% tax is withheld from royalties paid to residents. The tax withheld represents an advance payment of income tax.

A final tax of 35% is withheld from royalties paid abroad. The tax is withheld from 100% of fees paid abroad to nonresidents.

Under Colombian tax law, payments for the use of film or software and personal service fees are not treated as royalties. For the treatment of such payments, see 12.06.

Salaries and Wages

Employers must withhold income tax on wages, salaries, and other personal income derived from employment. The amounts withheld are based on the monthly salary, less exempt income and deductions, or on withholding scales issued for this purpose. Employees with taxable income that does not exceed the exempt bracket (see Table 10.05) are not subject to tax.

Employers also withhold employee social security contributions.

Other Payments

Tax is withheld from personal service payments at the rate of 10% in the case of residents or 35% in the case of nonresidents.

Tax is withheld at 4% on payments to residents for the use of films. In the case of nonresidents, the tax is withheld at 35%, but this rate applies to only 60% of the payment. Therefore, the effective rate is 21%.

Tax is withheld at 4% on payments to residents for the use of software. Although the rate is 35% in the case of nonresidents, this rate applies to only 80% of the payment. Thus, an effective rate of 28% applies.

The withholding tax is only 1% in the case of payments made under turnkey contracts. In the case of nonresidents, this rate applies to the total revenue from the contract, regardless of whether the work was performed within Colombia.

Summary of Basic Rates

Withholding tax rates for income received by residents and nonresidents are summarized in Table 12.07. The rates shown do not include the additional remittance tax, which is described at 12.08.

TABLE

Summary of Basic Withholding Tax Rates

Type of Payment                           Resident(%)  Nonresident(%)
Dividends                                      -              7
Taxable interest                               7              35(a)
Royalties                                      4              35
Personal service payments                      10             35
Payments for the use of films                  4              21(b)
Payments for the use of software               4              28(c)
Payments made under turnkey contracts          1              1(d)

Remittance Tax Rates

A remittance tax of 7% (from 1996) is withheld from payments remitted abroad, in addition to the withholding taxes described earlier in this chapter. The tax applies, whether the recipient is a resident or nonresident, to the types of income shown in Table 12.07, except that no remittance tax is levied on dividends.

The tax is applied net of the withholding tax shown in Table 12.07 or, in the case of payments for the use of films or software, to 60% or 80% of the net amount, respectively. Thus, the combined effective withholding rate on royalties, for example, paid to nonresidents is currently 39.55%:

35 + (7%  65) = 39.55%

On payments for films, it is 24.318%:

21 + (7%  79  60%) = 24.318%

On payments for software, it is 32.032%:

28 + (7%  72  80%) = 32.032%

A remittance tax of 1% applies to payments made under turnkey contracts in addition to the withholding tax indicated in Table 12.07. Both taxes apply to 100% of the payment.

Fees for technical services and technical assistance rendered within Colombia are exempt from remittance tax. Royalties of up to 3% of related sales or production are also exempt. Fees for technical services and technical assistance rendered outside Colombia are exempt from income and remittance taxes.

Remittances of branch profits, which include deemed remittances, are subject to remittance tax at the same rates as the dividend withholding tax described in Table 12.07. This is the only tax on branch profit remittances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

For further information contact Mario Andrade, Deloitte & Touche, Santafe de Bogota, Colombia on Tel: +57 1 256 1548, Fax: +57 1 256 1557